Other industry, Other domestic and international trade, Industry and trade; Industry and trade

Cofinancing (US $M)

42.7

26.51

L/C Number:

L4173

Board Approval (FY)

97

Partners involved

Closing Date

03/31/2002

09/30/2004

Evaluator:

Panel Reviewer:

Group Manager:

Group:

Kris Hallberg

Peter Nigel Freeman

Alain A. Barbu

OEDSG

2. Project Objectives and Components:

a. Objectives

To support sustainable economic growth and job creation in an open economy by enhancing the industrial competitiveness of South African firms, particularly of small, medium, and micro enterprises (SMMEs). Specific project objectives were to catalyze the use of technological, marketing, and productivity-enhancing business development services (BDS); support a process of information-sharing and foster networking among partnerships within sub-sectors; reduce bottlenecks associated with short-term trade financing for SMMEs; and expand the role of SMMEs in the industrial sector.

b. Components (or Key Conditions in the case of Adjustment Loans):

As originally designed, the project had three components:

Competitiveness Fund (CF) (appraisal estimate $20.64 million, actual $19.46 million): (i) a cost-sharing grant scheme under which firms were reimbursed for 50 percent of the costs of a broad range of approved business support services; (ii) assistance to firms preparing proposals for use of the Fund; (iii) 50 percent cost-sharing grants to business services providers; and (iv) free technical assistance to very small enterprises on business planning and development.

The project was cofinanced by the Government and the private sector (the latter in the form of cost-sharing).

In April 1998, shortly after loan signing, the Government requested cancellation of the STEFG component due to (i) the resistance of the Credit Guarantee Insurance Corporation to operate with new rules, and (ii) the Government's desire to avoid paying commitment fees for guarantees that might not be called. The possibility of excluding this component was discussed during appraisal and negotiations, and the Government was assured that it could cancel the component without penalty.

Following the mid-term review in early 2001, the Government proposed that the Competitiveness Fund sub-component (iv) be transformed into a matching grants program (the Black Business Supplier Development Program, BBSDP) to increase access to BDS by SMMEs owned and managed by previously disadvantaged individuals (black-owned or managed enterprises with up to 20 employees) by financing 80 percent of the costs of BDS. This program began operation in June 2003.

The loan closing date was extended two and one half years due to the delay in Parliamentary approval of the loan, delays in consultant selection reflecting the Government's lack of familiarity with Bank procurement procedures, and the transfer of the Competitiveness Fund component from a consulting firm to the Department of Trade and Industry.

Actual project costs were 57 percent of the appraisal estimate, primarily due to the cancellation of the STEFG component.

3. Relevance of Objectives & Design:

The project was the first Bank-financed project in South Africa in 31 years, and was the result of a lengthy dialogue between the Government and the Bank on trade and industrial policy issues. The objectives were consistent with the first pillar of the 1999 Country Assistance Strategy, "promoting growth and employment". Increased competitiveness and skills upgrading were necessary for firms to be able to compete successfully in an open economy and to support the country's political transformation with sustained economic growth. The development of SMMEs was seen as a vehicle for the upward mobility of South Africa's historically disadvantaged community.Although the design of the matching grants scheme was in line with current Bank practice at the time, it was not based on an assessment during project preparation of the reasons why firms were not using BDS, nor of the minimum subsidy needed to develop BDS markets. This affected the efficiency of the Competitiveness Fund component (see Section 5). Similarly, the design of the Sector Partnership Fund would have benefited from a greater understanding during project preparation of the constraints to formation of vertical and horizontal linkages among firms.

4. Achievement of Objectives (Efficacy) :

Improving the competitiveness of South African firms, particularly of small, medium, and micro enterprises: substantially achieved. Impact studies for the Competitiveness Fund show that CF beneficiaries performed better than non-beneficiaries in terms of labor and capital productivity as well as exports as a share of turnover. For the BBSDP program, participants had higher employment growth and investment in machinery and equipment compared to non-participants (However, these results should be interpreted with caution because they do not correct for possible selection bias -- the possibility that better-performing firms elected to participate in the program.)

Catalyzing the use of BDS: partially achieved. Surveys indicate that 86 percent of CF beneficiaries said they would make use of a BDS provider again in the future. However, the additionality of the CF scheme was mixed: almost two-thirds of CF beneficiaries said they would have initiated the CF-funded activity without the support of the CF program.

Fostering information-sharing and networking among partnerships within sub-sectors: not achieved. An evaluation study indicated that there was little sustainable increase in networks. New networks did not necessarily stay together beyond the program intervention, and SPF activities were not always catalytic. Some established partnerships would have performed the activity without SPF, and/or the partnerships were driven by service firms rather than being self-starting. Vertical and horizontal spillover effects within and outside partnerships were relatively weak.

Reduce bottlenecks associated with short-term trade financing for SMMEs: not achieved, due to cancellation of the Short-Term Export Finance Guarantee Facility.

Expand the role of SMMEs in the industrial sector: uncertain. The ICR does not provide information on the achievement of this objective.

5. Efficiency:

Impact studies showed that, in hindsight, the CF could have given out a lower level of subsidies, and suggested that subsidies greater than 50 percent of activity costs would be justified only in cases where there were important gains expected in skill development and employment creation. In the Borrower's contribution to the ICR, the Government suggested that the project was not sufficiently discriminating in selecting beneficiaries (i.e., not well targeted), and that cost was not the reason for insufficient use of BDS. It was suggested that, if information asymmetry was the main reason for low use of BDS, the grants might have been better used to fund information provision as opposed to service provision. Finally, the Government's contribution suggested that the project may have distorted prices for certain services, as providers inflated the costs of providing services knowing that the project would subsidize them.

6. M&E Design, Implementation, & Utilization:

Few specific outcome indicators were developed during project design, and periodic monitoring was not performed. Extensive quantitative and qualitative impact evaluations were carried out starting in November 2003, late in the project implementation period. The impact evaluations conducted appropriate comparisons of beneficiaries with control groups, but they did not deal with possible selection bias. In addition, the cost-benefit analysis in the impact evaluations seems to confuse public with private benefits.One of the positive institutional development impacts of the project was that the Department of Trade and Industry (DTI) gained experience with monitoring and evaluation.

Although one project objective was substantially achieved, the others were only partially achieved or not achieved and the efficiency of the project was reduced by the apparent over-subsidization of business development services (The ICR's 4-point scale does not allow for a moderately satisfactory rating.)

Institutional Dev.:&nbsp

Substantial

Modest

The project had a positive institutional development impact on DTI in terms of monitoring and evaluation, and in terms of implementing matching grant schemes. However, it appeared to have a modest impact on BDS providers and on networking and information-sharing among SMMEs.

Sustainability:&nbsp

Likely

Non-evaluable

The ICR provides little evidence on the project's long-term impact on the performance of SMMEs or on BDS market development.

Bank Perf.:&nbsp

Satisfactory

Satisfactory

Borrower Perf.:&nbsp

Satisfactory

Satisfactory

Quality of ICR:&nbsp

Satisfactory

NOTES:- When insufficient information is provided by the Bank for OED to arrive at a clear rating, OED will downgrade the relevant ratings as warranted beginning July 1, 2006.- ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness.

9. Lessons:

Interventions to develop markets for business development services require an initial market assessment to determine the constraints to the demand for and/or supply of services. Similarly, efforts to develop vertical and horizontal linkages among firms require a good understanding of interfirm relationships and the incentives to collaborate.

Especially in a new client relationship, it is useful to take stock of Government and Bank procedures and practices in order to anticipate and prevent delays in project implementation.

Clear performance targets should be established during project design, and periodic measurement and feedback to agencies and contractors should be done during implementation.

Projects or components that target specific disadvantaged groups need to maintain focus on that goal.

10. Assessment Recommended? Yes

Why?To contribute to a growing body of knowledge on the design and implementation of projects using matching grants and vouchers to develop BDS markets for SMEs.

11. Comments on Quality of ICR:

The ICR is of good quality, providing quantitative and qualitative evidence from the project's impact evaluation studies. It also has very good contributions from the Borrower. Shortcomings included the insufficient discussion of direct assistance to BDS providers, and the lack of information on the expansion of the role of SMMEs in the industrial sector.